Who's the beneficiary?

Ran across a very interesting question yesterday. Let me first say that the client will be directed to legal counsel, but in the meantime, I'm interested to see what opinions folks may have.

401(k) plan, participant "X" completed a beneficiary form years ago. Spouse as primary, Father as "contingent." Plan has normal language that a divorce revokes the spousal beneficiary designation.

X gets divorced. No QDRO directing that ex-spouse receive any benefits from the plan or must remain as beneficiary. X never completed a new beneficiary form.

Some years later, X dies. No spouse, no children. Plan, if there is no designated beneficiary, lists the parents of the deceased as 3rd in the hierarchy, after spouse and children.

X's parents are divorced. So here's the question.

Is a "contingent" beneficiary designation valid if the primary does NOT die? In other words, in this situation, is the Father the sole beneficiary, as a "contingent" beneficiary, or does the automatic revocation of the ex-spouse as beneficiary ALSO revoke the "contingent" status? If contingent status NOT revoked, Father is sole beneficiary. If contingent status revoked, then death benefit would be split between Father and Mother.

This may be a well-settled question in law, so maybe there is a standard answer?

Thanks for any opinions.

Is "contingent" defined in the original beneficiary designation or in the plan?

The plan doesn't specify. The beneficiary form has space for two "contingent" beneficiaries. The INSTRUCTIONS, but not the beneficiary form itself, have this sentence: "Contingent beneficiaries only receive benefits if all named primary beneficiaries predecease you."

Based on that sentence, IMHO, the entire beneficiary form has been revoked.

I don't know, I think it's ambiguous and not a slam dunk either way.  Hopefully Mom and Dad will cooperate and agree on a course of action and give the PA a hold harmless.  

I have never heard of a "divorce erases the ex off the beneficiary form" clause.

I've heard of language that confirms that only legal spouses qualify for QJSA, QPSA treatment, but never one that wouldn't pay the ex as the named Primary Beneficiary like anyone else.  

Been in the biz for 40+ years, more on the DB side than DC, but still.......

13 minutes ago, Pension Dork said:

I have never heard of a "divorce erases the ex off the beneficiary form" clause.

That is a fairly standard provision now in any pre-approved DB or DC plan.

I can see both ways. If divorce automatically revokes the (now ex) spouse as primary beneficiary, it is true that the primary beneficiary has not pre-deceased the contingent beneficiary, but the reason now is because there no longer is a named primary beneficiary, not because the primary beneficiary is still living. So it is as if the primary beneficiary designation were left blank and the contingent beneficiary was completed - which brings us back full circle - is that a valid election? That is, would the PA accept a form completed in such a manner from an unmarried participant? 

Personally, I think the participant's intent here was clear and that interpreting the above questions in that manner (Father gets the death benefit) by the PA is the proper way to proceed - but interested in what legal counsel my opine. Please report back if you remember.

I think if the participant could talk to us he would most likely say that he wants his Father to get 100%.  However, whether he realized it or not the caveat in the instructions became a part of his beneficiary designation and, consequently, the waters are muddied. 

8 minutes ago, CuseFan said:

Personally, I think the participant's intent here was clear and that interpreting the above questions in that manner (Father gets the death benefit) by the PA is the proper way to proceed

4 minutes ago, jpod said:

consequently, the waters are muddied. 

Not arguing that point at all, just that the intent was clear. And we all know the path of clear intentions are paved with muddy waters - or something like that!

The divorce did not revoke the complete beneficiary form.  It only revoked the spouse as the beneficiary.  The father is the bene per the completed form. 

That is the point we are debating here.  You're overconfident. 

There are two seemingly contradictory statements here. The first is  found in some of  the responders that "the divorce" revoked the beneficiary designation of the former spouse.  The second is in the original post that the 401(k) Plan documents provide that divorce revokes the spousal beneficiary designation. 

My first concern is that a beneficiary of a 401(k) plan can be anybody, spouse, former spouse, friend or neighbor.  So where is the logic of an automatic revocation of a spouse upon divorce.  Perhaps the parties had an Agreement that he would maintain her as the beneficiary.  In the normal course of events the 401(k) balance would be divided at the time of divorce by a QDRO.  Not so with respect to an agreement to maintain the former spouse as the beneficiary of that QDRO.  

Here is an article that seems on point and discusses the ERISA preemption of state law.  https://tax.thomsonreuters.com/blog/erisa-preempts-state-law-revoking-beneficiary-designation-upon-divorce/ 

If the Plan followed state law in revoking the former spouse as beneficiary, then that will not fly.  See  Kari E. Kennedy, Executrix v. Plan Administrator for Dupont Savings and Investment Plan, No 07-636 (Supreme Court 2009).  You can find this case at https://scholar.google.com/scholar_case?case=16253581861885772265&q=kari+e.+kennedy&hl=en&lr=lang_en&as_sdt=20000006&as_vis=1

And In Egelhoff v. Egelhoff, 532 US 141 (2001), the United States Supreme Court found that ERISA trumps a statute from the State of Washington that would have invalidated a beneficiary designation upon divorce, and that the named beneficiary would receive the proceeds of a life insurance policy notwithstanding that the decedent and the named beneficiary had been divorced.   You can find this case at https://scholar.google.com/scholar_case?case=8556034538245660748&q=egelhoff+v.+egelhoff&hl=en&lr=lang_en&as_sdt=20000006&as_vis=1

On June 3, 2013, the United States Supreme Court issued a decision in Hillman v. Maretta,  No. 11–1221 (S.Ct. 2013) dealing with life insurance programs payable pursuant to the Federal Employees Group Life Insurance Act (“FEGLIA”).  This was similar to Egelhoff in that the Code of Virginia contained a provision that, where the marital status of the insured party had changed, and he had failed to change his beneficiary designation to someone other than his former spouse prior to his death, the former spouse who receives life insurance proceeds to which she was not entitled would be required to pay them over to the widow (or other person designated by law to receive the proceeds e.g. per the law of intestacy) of the forgetful deceased party.   The issue was whether FEGLIA trumped the law of Virginia.  Note that there was no “QDRO” or equivalent document since the deceased party was not required to maintain life insurance for the former spouse.  You can find this case at https://scholar.google.com/scholar_case?case=9826259326218059818&q=Hillman+v.+Maretta&hl=en&lr=lang_en&as_sdt=20000006&as_vis=1

Another very good case on the subject is  Hennig v. DIDYK, Tex: Court of Appeals, 5th Dist., No. 05-13-00656-CV, (2014) that you can find at https://scholar.google.com/scholar_case?case=1419348984792461652&q=Hennig+v.+DIDYK&hl=en&lr=lang_en&as_sdt=20000006&as_vis=1

The basic rule is that the Plan Administrator is required to pay ERISA plan benefits to the named beneficiary and that ERISA preempts any state law mandating another result.  So the first point of inquiry is WHY the Plan provided that a beneficiary designation to a former spouse is automatically revoked?  I have never seen that in 32 years of preparing QDROs.  If the Plan was following state law, ERISA will preempt that requirement and the former spouse will be the named beneficiary of the 401(k). 

This same rule has applied to IRA accounts. See    PaineWebber v.  East, 363 Md. 408, 768 A.2d 1029 (2001) - which you can find at - 
http://scholar.google.com/scholar_case?case=14624602948014812254&q=paine+webber&hl=en&as_sdt=4,21.  

In that case the husband failed to remove his ex-wife's name as beneficiary of his IRA account [IRAs are not subject by ERISA] valued at about $600,000.00 which, per the agreement of the parties, he was to retain as his property.  The husband remarried and then died without having changed the beneficiary.  The former spouse filed suit to recover the IRA balance arguing that she was the named beneficiary - which was true.  The Court of Appeals held that the former spouse would receive the money despite language in the separation agreement that provided:

        "Each of the parties hereby expressly waives any legal right either may have under any Federal or State law as a spouse to participate as a payee or beneficiary regarding any interests the other may have in any pension plan, profit-sharing plan, or any other form of retirement or deferred income plan including, but not limited to, the right either spouse may have to receive any benefit, in the form of a lump-sum death benefit, joint or survivor annuity, or pre-retirement survivor annuity pursuant to any State or Federal law, and each of the parties hereby expressly consents to any election made by the other, now or at any time hereafter, with respect to the recipient and the form of payment of any benefit upon retirement or death under any such pension plan, profit-sharing plan, or other form of retirement or deferred income plan."

There are many more cases dealing with this same issue.  
 

fmsinc, I didn't have the patience to read your entire post, but the salient point here is that the Plan document, by its terms, says that a spousal designation is automatically revoked upon divorce which is in fact becoming more common these days as an effort to avoid having the plan becoming involved in contentious litigation.  As such, ex-spouse is out of the picture regardless of what the decedent's intent may have been. 

1 hour ago, CuseFan said:

Not arguing that point at all, just that the intent was clear. And we all know the path of clear intentions are paved with muddy waters - or something like that! 

If the account balance is $2.00, well sure go ahead and pay it to the Father.  If it is $200,000, acknowledging the ambiguity and proceeding cautiously is the way to go.

Automatic revocation of spousal designation. A divorce decree revokes the Participant's prior designation, if any, of his/her spouse or former spouse as his/her Beneficiary under the Plan unless: (a) a QDRO provides otherwise; or (b) the Employer in Appendix B elects otherwise. This Section 7.05(A)(1) applies solely to a Participant whose divorce becomes effective on or after the date the Employer executes this Plan unless: (i) the Plan is a Restated Plan and the prior Plan contained a provision to the same effect; or (ii) regardless of the application of (i), the Employer in Appendix A provides for a special Effective Date for this Section 7.05(A)(1).

Straight from the Corbel document.....

FWIW, depending upon which document you are using, the language is even simpler. From the FIS PPA 401(k) VS document:

(f) Divorce revokes spousal Beneficiary designation. Notwithstanding anything in this Section to the contrary, unless otherwise elected in Appendix A to the Adoption Agreement (Special Effective Dates and Other Permitted Elections), if a Participant has designated the Spouse as a Beneficiary, then a divorce decree that relates to such Spouse shall revoke the Participant's designation of the Spouse as a Beneficiary unless the decree or a "qualified domestic relations order" (within the meaning of Code §414(p)) provides otherwise or a subsequent Beneficiary designation is made.

Who's the beneficiary? Big question.

Does anyone know of a Federal Court case which ratified that automatic revocation upon divorce clauses in a plan are legal and enforceable.  

I felt that I had to put my two cents into this debate. State "revoke upon divorce" statutes treat the former spouse as if s/he died before the participant. A plan provision that revokes the beneficiary designation as to the spouse following a divorce would operate in a similar way. The former spouse is treated as if s/he died first, thus revoking the designation. Since there is only one contingent beneficiary named in the form, the father would get the entire account of the participant. If the father doesn't want the money (what if s/he is in a nursing home or collecting Medicaid and receipt of the participant's account balance would disqualify him for Medicaid?), the father could disclaim his right to the account balance which would also operate as if the father died before the participant. Some plans have the participant's estate as the very last catchall default beneficiary. That would likely not be desirable because it would cause the benefit to be included in the participant's estate for state law purposes and potentially subject it to a state level estate or inheritance tax.